The “License as Tax” Fallacy

Abstract

Intellectual property licenses are commonly portrayed as a “tax” that limits access to technology assets, which in turn stunts innovation by intermediate users and inflates prices for end-users. Renewed skepticism toward IP licensing, and associated judicial and regulatory interventions that apply per se-like liability rules under patent and antitrust law to IP licensing, overlook the fact that IP licenses typically play a “positive-sum” enabling function, rather than a “zero-sum” exclusionary function, by mitigating expropriation risks that would otherwise frustrate transactions between the holders of complementary specialized IP and non-IP assets. As illustrated by paradigm examples of licensing and other IP-dependent arrangements in content and technology markets, these transactional structures facilitate value-creating exchanges of knowledge assets, promote the division of labor among innovation and production specialists, and lower entry costs for firms that have strong innovation capacities but weak production and distribution capacities. An analytical framework that overlooks the enabling function of IP licensing is prone to recommend “false positive” policy actions that undermine the formation of markets in IP assets and, more generally, induce organizational distortions and reduce competitive intensity by disadvantaging R&D-specialist entities that rely on licensing-based monetization mechanisms while favoring integrated firms that maintain end-to-end commercialization structures.